Moody's Warns on Muni Debt (Sort Of)

This is why Moody's doesn't get the heat that Meredith Whitney does. Their warning is as opaque as are the financials behind many muni bonds,

Moody’s said it expects defaults and distress in the US municipal bond markets but in the same breath said it does not anticipate a broad “crisis of confidence”.

“There may be additional defaults in the municipal sector. There certainly is going to be distress in the municipal sector,” said Raymond McDaniel, chairman and chief executive of Moody’s, in an interview with FT. “But we differentiate that from a broad-based systemic problem.”

“Because market participants have generally viewed that [municipal debt] as a risk-free area, [the question is] whether an individual credit problem can create a broader confidence problem. That’s where the systemic implications come in and what we and others are trying to be alert to.”

Potential for systemic risks emerging from municipal markets could not be ruled out, he said. “We consider it very unlikely. We do not rule that out."

How they can rule out contagion as unlikely is a great mystery. As Moody's readily admits the financials behind many muni deals are opaque, If a few munis face distress, there is little information to provide comfort for many other muni bonds. Who is going to continue holding those bonds, when other bonds in the muni market are collapsing?

Bottom line: Moody's sees the same dangers Whitney does. They are just not as clear and straightforward about their warning. Which means Charlie Gasparino won't be demanding their work product.